Client Service December 3, 2024

Cerulli Finds Growing Dominance in Fee-Based Advisory Programs

The rise of managed accounts and increase in holistic financial advice is driving the trend.

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The latest issue of “The Cerulli Edge—U.S. Monthly Product Trends” highlighted the growing dominance of fee-based advisory programs in retail wealth management.

Over the past decade, assets in fee-based systems, such as managed account programs and those overseen by registered investment advisers, have grown by 169%, compared with a 92% increase in overall adviser assets. Assets managed by brokerages, by comparison, grew by about 40% in that same time period.

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According to Cerulli Associates, this shift reflects investors’ preference for holistic, fiduciary-aligned advice tailored to their financial goals. Cerulli noted that fee-based managed account platforms have become pivotal in this trend, as they allow advisers to offer fee-based services in other areas as well, such as financial planning, goal tracking and tax management.

“For the retirement plan adviser, this represents an inflection point, deciding the practice’s commitment to the individual retail wealth management,” says Scott Smith, Cerulli’s director of advice relationships. “Fee-based advisory relationships primarily operate on the chassis of comprehensive financial planning. Serving retail planning clients can’t be done competently and at scale without being a core element of the practice.”

The evolution of fiduciary standards has also played a significant role in the shift away from the previously dominant brokerage commission model, according to the consultants.

While the SEC’s June 2020 implementation of Regulation Best Interest enhanced investor protections, it fell short of a true fiduciary standard, Cerulli stated. Managed account platforms, by formalizing advisers’ commitment to prioritizing client interests, meet the expectations of an increasingly informed investor base, while also freeing advisers up to provide other services.

Portfolio construction, traditionally the cornerstone of financial advisory services, is undergoing rapid transformation in part because of these shifts. As the wealth management industry continues to embrace goals-based advice and fiduciary frameworks, Cerulli predicted an increasing proportion of new assets will flow into managed accounts.

Investment Trends

Cerulli’s report also tracked retail investment vehicles through October.

Lower-cost exchange-traded-fund assets dipped slightly, falling 0.4% to $9.9 trillion in October. However, the sector achieved record-breaking inflows of $123 billion, marking the second-best month in history and the strongest for 2024. Passive ETFs excelled, surpassing $800 billion in assets and $30 billion in net flows for the first time.

Active ETFs also showed notable progress, with companies such as J.P. Morgan, Fidelity, Dimensional and Capital Group collectively drawing more than $2 billion in inflows. Large-blend ETFs were the top contributors, gathering $43.3 billion, while China region ETFs followed closely with $9.6 billion, supported by optimism spurred by China’s stimulus initiatives.

Meanwhile, mutual fund assets experienced a 1.8% decline in October, falling to $20.2 trillion, driven by $41.4 billion in net outflows. Active funds bore the brunt, with $11.4 billion in outflows, consistent with the 2024 monthly average.

Equity and allocation funds, with various types of investments, lost a combined $77.9 billion during the month, with large-cap equity funds accounting for $43.6 billion of these outflows. Despite these challenges, firms such as Baird, J.P. Morgan, Bridge Builder, PIMCO and Lord Abbett stood out, each attracting more than $1 billion in inflows, primarily through fixed-income offerings.

 

Data & Research December 3, 2024

Nearly Half of Retirees Have No Formal Decumulation Strategy

A similar 46% say they get minimal to no guidance on decumulation from their employer or 401(k) provider, according to a survey by IRALOGIX.

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While “decumulation” may be trending among retirement plan professionals heading into 2025, it may not be on the radar of many retirees.

According to a survey of 264 retirees conducted in October by IRALOGIX, about half (49%) said they forgo a formal retirement savings withdrawal strategy, instead opting to take what they need as they go. Meanwhile, 53% reported that they adjust their withdrawals based on a change in their personal lives (not market changes or more holistic financial planning) or, otherwise, do not make any adjustments at all.

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IRALogix, founded in 2015, offers wealth managers a white label individual retirement account service with no minimums to create relationships with “tomorrow’s clients.” When it comes to those who have gone through their working years and are in retirement, however, the firm found that 46% receive minimal or no decumulation guidance from their employer or 401(k) provider.

For people to manage through retirement, that needs to change, says Peter de Silva, IRALOGIX’s CEO.

“It is important for a retiree to have a thoughtful, comprehensive approach to decumulation,” de Silva says. “Unfortunately, most people are left woefully unprepared by their workplaces and providers.”

When it comes to decumulation planning, only 22% of respondents said they draw down their savings as part of a systematic process based on a fixed annual percentage. Another 17% said they only spend dividends and interest.

De Silva, who has experience in both individual wealth management and institutional asset management, is a proponent of retirees creating a plan that leads to withdrawing a percentage of their available assets. That strategy, he says, will allow them to flex their spending up or down, depending on the markets.

A “fixed dollar” approach can also work, though that may create problems either by running out of money if markets drop or by missing out on gains if markets are up, according to de Silva.

Inflation and Health Care

If retirees do mismanage decumulation, more than half may run out of funds within a year, according to the survey. Among the 264 survey respondents, 31% maintain a cash reserve cushion to meet unexpected expenses that lasts from six to 12 months, and 25% do not maintain a cushion at all.

Meanwhile, two areas in which retirees may need guidance are adjusting for inflation and planning for health care costs.

According to IRALOGIX, 44% of respondents said inflation has minimal to no impact on their savings withdrawals, with another 31% noting that they know there is some impact, but they have not made any adjustments to accommodate it.

Those statistics are a problem, in de Silva’s eyes, as inflation can create a real “erosion of savings” that can cause problems for retirees who are not planning on it.

The survey also revealed a lack of understanding of health care costs: 39% of respondents said health care costs do not play a significant role in withdrawal strategies. De Silva says a vast amount of expenses can hit in the last year or two of life, which can significantly alter a person’s plans for what they might leave behind to heirs.

For health care, de Silva recommends creating a financial plan to address or, potentially, mitigate losses through an investment in long-term health insurance.

6 Factors

De Silva boils a strong retirement decumulation plan to six dimensions:

  • Setting retirement lifestyle goals;
  • Considering what you want to accomplish in retirement;
  • Estimating health care needs;
  • Estimating tax spending;
  • Settling on a risk tolerance level; and
  • Having an estate plan for where remaining assets should go when you pass.

Following these steps will create a “much more responsive approach that can help extend the life of the 401(k) balance,” de Silva says.

To create such a plan, however, takes a “triangle of resources,” per de Silva, including an employer, a recordkeeper and an adviser, when possible. But since most people currently do not work with an adviser, de Silva says employers will have to start taking more responsibility for providing guidance or connecting people to resources.

“There is such little decumulation advice out there,” he says. “Since all this comes down to having a decumulation plan that links to your overall financial plan and estate plan tied together in a thoughtful way, plan sponsors and recordkeepers need to do a much better job of providing guidance.”

In coming years, de Silva expects in-plan resources for participants to continue improving and evolving.

“In five years, I think there will be a whole cottage industry just around decumulation,” de Silva says. “We need to solve this problem, and at the moment, nobody is solving it well.”

IRALOGIX’s survey was conducted online in October 2024 with a national sample of 264 retirees.

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